5Things To Know Ahead of the Euro-Zone GDP Report

The second quarter report on euro-zone gross domestic product should make for grim reading (Euro-Zone GDP Live: Follow our blog). GDP is expected to have expanded just 0.1% from the previous quarter, according to a survey of economists, or around 0.4% in annualized terms. That’s half the first quarter’s weak gain and far below what is needed to significantly reduce unemployment or alleviate debt burdens.

1Expect a German Drag...

German GDP is expected to decline 0.1% from the previous quarter. This would mark the first time since 2009 that the euro-zone’s largest economy has lagged the bloc as a whole.

By itself this isn’t a cause of big concern. Germany’s 3.3% annualized first quarter growth rate (0.8% quarterly) was artificially strong—mainly due to weather-aided construction activity—so some payback is expected. But recent surveys suggest the Ukraine conflict may dampen any rebound during the second half. The euro zone can’t move into a higher growth gear without Germany.

Bloomberg News

2...And Some French Malaise

The euro-zone’s second-biggest economy is unlikely to help. French GDP is seen rising 0.1% from the previous quarter. Unlike Germany, there are no statistical quirks to explain the weakness. France has been mired in flattish growth with sagging confidence for several quarters. That is unlikely to change anytime soon, shattering the government’s plans to stimulate growth while keeping within EU budget rules.

0.1%
Expectations for French GDP growth

3There Are Still Stressed Countries

The bloc’s fragile periphery is going in opposite directions. Spain already reported second quarter growth of 0.6% while Italy slid back into recession. How Portugal performs will help gauge whether countries that have enacted structural reforms are faring better than those that haven’t (as European Central Bank President Mario Draghi contends is the case.)

Reuters

4Watch the Slack

A consensus GDP rise would leave the euro zone 2.4% below its pre-crisis peak in 2008, according to J.P. Morgan economist Greg Fuzesi. The U.S. and U.K. have recouped output lost during the Great Recession. If the euro zone maintains its recent lackluster pace, it would take three more years just to get back to 2008 GDP levels. This means a ton of economic slack should keep unemployment high and inflation super low.

5ECB Implications

The ECB’s forecast for 1% growth this year looks optimistic. A downward revision may put added pressure on it to take more drastic actions–such as quantitative easing–to revive growth and bring annual inflation—now 0.4%–closer to its 2% target.